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S&P forecast Downside Risks For Asia-Pacific Financial Institutions In 2023

Nov 15, 2022, 09:45 am

As per S&P’s forecasts lower growth, rising inflation, and tighter financing will keep downside risks high for financial institutions in Asia-Pacific. Another key drag is slower growth in China, the region's largest banking system by far. This is according to a chartbook they published on Nov 15, 2022, titled "Asia-Pacific Financial Institutions Credit Outlook 2023--Downside Risks Endure."

"Given tougher conditions, the gap could potentially widen between stronger and weaker financial institutions in the Asia-Pacific," said S&P Global Ratings credit analyst Geeta Chugh. "Lower economic growth, higher interest rates, tighter financial conditions and weaker currencies across many jurisdictions will increasingly strain borrowers."

Potential recessions in the U.S. and Europe, and China's lower growth rates are hitting Asia-Pacific's economic growth. As the region is a net exporter, a global slowdown will hinder the recovery of corporate and government revenues. In many cases, revenues aren't yet back to 2019 levels.

Although consumer price index (CPI) inflation in parts of the Asia-Pacific is tamer than in Europe or the U.S., higher prices of energy, commodities, and other goods are hurting borrowers. Energy subsidies are squeezing government finances. Many corporates have yet to fully pass through the additional cost of goods. This implies CPI inflation could persist.

Excepting China and Japan, official interest rates in the region are rising. This is in part to combat inflation and in part, to defend domestic currencies against the strong U.S. dollar.

"Higher interest rates will boost net interest margins for most financial institutions," said Ms. Chugh. "However, worse headwinds than we currently expect would dampen credit demand, pressurize smaller corporate borrowers that are still healing from the impact of the pandemic, and push highly leveraged consumers to the brink of default."

Most banks have some resilience at current rating levels. Capital buffers and good provisioning coverage support this. Banks and other financial institutions in New Zealand may face greater challenges. Nonetheless, systemically important banks in this jurisdiction have stable outlooks, given the support from highly rated parent banks.

China is slowing. The country's intermittent lockdowns have dented consumption and economic activities. And the property sector slump has undermined market confidence. We estimate that about 40% of Chinese developers are in financial stress. Defaults could rise. Also, a "mortgage repayment strike" by some borrowers, if not contained, could evolve into systemic risk.

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